Real Income Growth Is In Decline

The labor market is one of the most important factors which affect the markets because it determines Fed policy and it determines personal income growth which is the money the consumer uses to make purchases. Of course, the consumer can borrow money, but people aren’t qualified nor able to borrow money when they don’t have a job. The reason leverage gets too high is because consumers assume they will keep their job; they take out debt, get fired, and then can’t pay the loans back.

The latest data on real personal income growth shows 1.5% growth. This is a great summary of the economy as it peaked at 2.6% in December. The problem with this data it is updated as of March, so we need to look at other data to make forecasts. Delayed hard data does a great job of confirming trends, but it tells us little about the future. Even the latest jobs report, which I’ll continue analyzing in this article, has more updated information.

Details Of The Jobs Report

As was shown in the ADP private sector payrolls report, the professional and business services industry added a great deal of jobs. The industry added 43,700 jobs in April. There were 10,300 temporary jobs added which was soft. Generally, when the labor market is overheating, the number of temporary workers added is heightened. Many temporary workers are even added as full-time workers. With the low wage growth, it doesn’t appear the labor market is overheating which makes the weak temporary job creation not a surprise. Transportation added 0 jobs which is surprising considering how overheated the trucking industry has become. Wages will be increasing in this segment to solve the supply problem. I find this very interesting because this might be the last business cycle where trucking jobs are in demand since driverless cars and trucks could become utilized in the next 5-10 years. The higher truckers’ wages grow, the more motivation firms have to advance the technology, just like how high oil prices encourage the advancement of electric cars.

(Click on image to enlarge)

The JOLTS Report

The job openings and labor turnover survey is often referred to as Janet Yellen’s favorite labor market metric. She’s no longer the Fed chairperson, but it’s still an important data point to review. As you can see in the chart below, the job openings soared. The number of job openings in March was up 472,000 jobs to 6.55 million which is a record. It’s not surprising to see a record since the population has been increasing. That said, the number of openings is shocking as this is the highest number of vacant jobs and the biggest 3 month increase in job openings. In theory, if there are much more job openings than hires then the wage growth will spike. It’s the supply and demand of workers. That being said, we have seen the NFIB index signaling a large difference between the numbers of job openings and hires for a few months, yet nothing major has happened to wages.

(Click on image to enlarge)

New Normal Of Low Wage Growth

The question of wage growth continues to plague economists and Fed officials. There’s a possibility that accelerated wage growth doesn’t occur even when the labor market is officially tight, which it probably isn’t yet. In Japan wage growth has been tough to achieve even though the unemployment rate is only 2.5% and the labor participation rate is higher than in America. Arguably, this isn’t a problem. One frame of mind is that wage growth encourages inflation which encourages the central bank to be hawkish which eventually catalyzes a recession. A perennial economy with low unemployment and low inflation is actually a great situation which achieves both of the Fed’s targets.

In this new dynamic where inflation doesn’t spike at the end of business cycles, the Fed is making a mistake by raising rates. The Fed is operating under the old playbook where it needs to hike rates to cut them, but inflation isn’t spiking as demographics cause interest rates to fall. It would be a big blunder to cause a recession while the inflation rate is still below the target. Obviously, it’s very difficult to be in charge of monetary policy because it’s always tough in real-time to determine what’s a game changer and what’s normal cyclical action. It’s just like investing where investors need to determine in real-time if stocks will continue rallying because of the accelerated earnings growth or if this time is different because the earnings boost is occurring at the end of a business cycle.

Length Of The Time Spent Unemployed Still Elevated

On the positive side, the number of workers who quit their job was up from 3.208 million to 3.344 million. That’s very close to an all-time record. Record job vacancies and record quits make sense because it’s easy to quit your job if you know so many jobs are vacant. There were 1.6 million layoffs and discharges which was unchanged from February. This brings us to the chart below which shows the duration workers stay unemployed. It’s interesting to see in a labor market where there is so much hiring, low unemployment, and high job vacancies that the median and average duration of unemployment still hasn’t normalized.

(Click on image to enlarge)

The chart below breaks down the unemployment by duration. As you can see, the number of people unemployed for 27 weeks or more skyrocketed during the financial crisis. This explains why the duration of unemployment hit the highest point since at least the late 1940s. It is taking a long time to recover from the worst recession since the Great Depression.

(Click on image to enlarge)

Conclusion

One point that I would like to expound upon from a previous article is this was the coldest April in 20 years in America. This explains why there were so many workers who couldn’t get to work because of the weather. It’s tough to say how many jobs would’ve been created with ideal weather. The best way to tell will be to see the May labor report in a few weeks.